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China Cuts Reserve Requirement, Keeps Interest Rate Unchanged

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China has reduced the amount that banks must keep in their reserves to boost liquidity in the country, even as its economy faces the worst COVID-19 outbreak in two years.

Source: Bloomberg

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The People’s Bank of China slashed the reserve requirement ratio by 25 basis points for most banks, and by 50 basis points for small lenders. The one-year policy interest rate was maintained.

The reduction will take effect on April 25 and is expected to translate into 530 billion yuan or $83 billion worth of infusion into the country’s financial system. This last reserve requirement cut was in December 2021.

The announcement comes after signals by the State Council earlier this week, which reiterated risks to growth and the necessity to boost both monetary and fiscal stimulus to support recovery.

Economists believe the liquidity boost will help on the margin, but it will not address the root of the problem as the country faces difficulties due to the outbreaks caused by the COVID-19 Omicron variant and the restrictions that come with it.

Economists also believe the PBOC could drift away from further reductions, given the already low rates.

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